DOE Issues Conditional Export Authorization of Domestic Natural Gas

On May 20, 2011, the Office of Fossil Energy of the Department of Energy (“DOE”) issued an order conditionally authorizing Sabine Pass Liquefaction, LLC (“Sabine Pass”) to export domestically-produced liquefied natural gas (“LNG”) from the Sabine Pass LNG terminal in Cameron Parish, Louisiana to countries with which the United States does not have a free trade agreement (“FTA”) requiring the national treatment for trade in natural gas and LNG.  The conditional authorization approves the export of up to the equivalent of 16 million metric tons per annum (or approximately 2.2 Bcf/day of natural gas) over a 20-year term.  This is the first time DOE has authorized the long-term (greater than 2 years) export of domestically produced natural gas from the lower-48 states as LNG to non-FTA countries.  However, DOE imposed an important condition allowing it to revisit this authorization at any time.

BACKGROUND

On September 7, 2010, Sabine Pass filed an application with DOE to export domestically-produced LNG to non-FTA countries from its LNG terminal in Louisiana.  Under Section 3 of the Natural Gas Act (“NGA”), DOE must approve an export to a non-FTA country unless it determines that the proposed export “will not be consistent with the public interest”.[1]  When considering an application to export LNG to non-FTA countries, DOE focuses on the domestic need for the gas to be exported, whether the proposed export poses a threat to the security of domestic natural gas supplies, and any other appropriate issue, including the environmental impact of the proposed export.[2]

In its application, Sabine Pass relied on data from many sources, including privately-commissioned studies, to address the issues of domestic need for the gas to be exported, security of domestic supplies, and the impact of exports on domestic natural gas prices.  The application was supported by numerous federal, state and local representatives, energy companies and organizations.  Two groups – the Industrial Energy Consumers of America (“ICEA”) and the American Public Gas Association (“APGA”) – opposed the application, arguing that the export of substantial quantities of domestic gas supplies over a 20-year period may have significant adverse implications for domestic natural gas consumers, domestic energy supply, and national security.

DOE ORDER

DOE determined that Sabine Pass has submitted substantial evidence showing that existing and projected future supplies of natural gas support the proposed export and meet domestic natural gas demand over the 20-year term of the requested authorization.  DOE noted that Section 3(a) of the NGA creates a rebuttable presumption that a proposed natural gas export is in the public interest, and that the DOE must grant the application unless opponents overcome that presumption.[3]  No commenters or parties submitted any studies to contradict those submitted by Sabine Pass.  DOE found that while ICEA and APGA had alleged potential negative impacts that would result from approval of the proposed export, none of their arguments were supported by factual studies or analyses.

DOE determined, however, that no person can warrant that the studies submitted by the applicant “will prove completely accurate over the entire 20-year projected term of the requested authorization.”[4]  Potential changes to technology, as well as environmental, regulatory, and safety considerations, could affect the accuracy of projections made in the studies.  In particular, DOE noted that on-going investigations into the environmental consequences of shale gas production could reduce the supplies of natural gas below the Sabine Pass projections.  Other factors could also affect international market conditions that could alter the economics of Sabine Pass’s export project.  Accordingly, DOE announced that it would “monitor” such conditions to “ensure that the exports of LNG authorized herein and in any future authorizations of natural gas exports do not subsequently lead to a reduction in the supply of natural gas needed to meet essential domestic needs.”[5]  DOE noted that it has the authority under Section 3(a) of the NGA, following a hearing and for good cause shown, to issue a supplemental order to take action “as is necessary and appropriate should circumstances warrant it.”[6]

DOE imposed two other significant conditions to the export authorization.  First, DOE required that Sabine Pass begin LNG export operations “no later that 7 years from the date of issuance of this order.”[7]  DOE explained that the purpose of this condition was to ensure that other entities that might seek similar export authorizations in the future would not be frustrated in efforts to obtain the authorizations by holders of existing export authorizations that are not actually engaged in export operations.  Second, DOE noted that in order to export LNG, Sabine Pass had applied to the Federal Energy Regulatory Commission (“FERC”) for authority to construct and operate the necessary facilities.  DOE stated that final export authorization would be conditioned on the satisfactory completion of the environmental review process under the National Environmental Policy Act by FERC and DOE and a finding of no significant impact.

IMPLICATIONS OF THE EXPORT ORDER

On its face, this export authorization should encourage other proposals to export domestic gas supplies from LNG terminals in the United States.[8]  Updates of potential domestic natural gas supplies continue to project increased production in the future which could maintain a surplus of domestic supplies sufficient to support LNG exports and meet domestic demand.[9]  DOE’s reiteration of the rebuttable presumption in favor of exports and the need for opponents to present more than argument to rebut studies in support of a proposed export should serve to clarify DOE’s standard and the review process.  DOE’s requirement that the holder of an export authorization must begin actual export operations within 7 years should provide assurance that obtaining export authorization would not, in and of itself, establish a priority queue that could block other export authorization holders.

DOE’s imposition of a “monitoring” condition to ensure that LNG exports authorized in the order and in future orders would not subsequently lead to a reduction in the supply of natural gas to meet essential domestic needs creates uncertainty over the ability to rely on the authorization over the entire 20-year term, which could have the obvious effect of restricting or increasing the cost of financing these capital-intensive energy infrastructure projects.  While DOE’s concern with the reliability of future projections of domestic gas demand and supply is understandable, DOE does not define the type of supplemental order it would issue or, most importantly, what changes to the initial authorization it might decide to impose.  It does not appear that DOE has ever issued a “supplemental order” that revoked an existing LNG export authorization based on changed economic conditions where the exporter was otherwise in compliance with the terms and conditions.  A predecessor agency within DOE, the Economic Regulatory Administration (“ERA”), determined that it had the authority to revoke an LNG import authorization.[10]  The ERA’s authority under NGA Section 3(a) was appealed, but the court did not reach this issue.  The court stated that it “did not address the nettlesome issue whether the [DOE] does indeed have authority to revoke a Section 3 authorization, pursuant to which approximately $1 billion was invested in U.S. facilities alone, in the absence of a violation of the terms of the authorization.”[11]  Thus, the extent and scope of DOE’s authority to issue a supplemental order following the issuance of an export authorization remains unclear.  Sabine Pass may or may not seek clarification of this condition.  In the meantime, those intending to obtain or provide financing to facilities that receive an authorization similar to Sabine Pass will likely want to thoroughly understand the potential risks and consequences of any DOE supplemental order.